JERUSALEM, Aug. 10 -- Five years ago, Israel's decision to build a sprawling housing complex on a pine-covered hilltop in East Jerusalem temporarily brought peace negotiations with the Palestinians to a halt. The plan was condemned by the United Nations, criticized by the United States and bitterly protested by Palestinians and left-wing Israelis.

But in Jerusalem, the extreme, even the shocking, has a way of becoming as routine as a mortgage payment.

Now the project, called Har Homa, is becoming a reality of stark white stone and glass brick, a suburban dream hewn from a tormented landscape. A work still in progress, it is drawing together -- or at least juxtaposing -- the conflict's insiders and outsiders, its winners and losers, in a reluctantly shared enterprise that is as political as it is commercial. Like Jerusalem itself, it is a place that evokes the ache of homes lost, and the balm of homes found.

The first Israeli families are moving in, driving up the hill past billboards proclaiming "the Heights of Prestige" and listing amenities from Jacuzzis to kitchen cabinets of fine veneer to "prestigious ceramic tile floors."

On a dust-choked construction site overlooking the revered, war-battered town of Bethlehem, which lies still as stone under 24-hour Israeli curfew, Romanians, Chinese and Turks are laboring to build Har Homa, earning some money to send home from the heart of a conflict few of them grasp.

They work alongside a few Palestinians who -- conscience-stricken but desperate for the wages, understanding the conflict in their bones -- sneak past the Israeli police, defying Israeli law to help Israeli contractors build what the Palestinians regard as an Israeli settlement on stolen land.

"My heart is bleeding," said Salman Jahalin, 28, his corduroys covered with the hilltop's powdery white dust. "I feel guilty for being here and doing this kind of work. But I have no other choice."

Mr. Jahalin, the father of four, is from the West Bank village of Zaatara. In addition to being a laborer at Har Homa, he has become one of its first -- if illegal -- residents. He sleeps most nights on the stone floor of a newly built storeroom rather than risk being caught and arrested by the Israeli border police while returning home.

In a conflict that revolves around location, location, location, Har Homa is a monument to the shifting political geography. The property here was captured from Jordan by Israel during the 1967 war, then incorporated into Jerusalem's expanded boundaries.

To the Israeli government, Har Homa is a Jerusalem neighborhood, not a settlement, and it is also a strategically placed buffer against the Palestinians.

To many of those moving in, Har Homa is an affordable home with a stunning view of the khaki Judean hills, planted with olive orchards and spiked with the minarets of mosques.

Talia Daniel, 32, moved into Har Homa more than a month ago with her husband and three sons. "This is my first house," she said proudly. "It's a beautiful place, very prestigious, even if it's close to the Arabs."

She expressed no fear that her family's view of Bethlehem or its safety might be compromised by the conflict. "Today, every place is frightening in Jerusalem," she said. "What's special about here?"

Most of the land that is now Har Homa was owned by Jews when the government expropriated it in the early 1990's. But other parts were owned by Arabs, including some owned by the family of Muhammad Abu Tair, 47, an electrician who comes from a nearby Palestinian village, also now incorporated into Jerusalem's limits.

He now works at Har Homa. "They are good houses," he said sadly of his work. "Good and beautiful houses."

In 1997, in what seems like another age, Yasir Arafat, took his complaints over Har Homa direct to President Bill Clinton; Mr. Arafat's top representative in Jerusalem described the housing project as "a declaration of war against the Palestinians." Hosni Mubarak, the president of Egypt, warned that the decision to build Har Homa would be "the beginning of a new cycle of violence." The State Department rebuked Israel for its plans.

Now, no one in Israel says much about it. "Politically, I think it's largely faded into the background," said Jeff Halper, the coordinator of the Israeli Committee Against House Demolitions. "It's sort of a fait accompli, I think."

Mr. Halper described Har Homa as part of Israel's efforts to create "facts on the ground" that would impede concessions of territory in any peace deal. "There are so many fronts that, if you're the peace movement, you can't keep up," he said.

Israelis may not think much these days about Har Homa, but residents of Palestinian towns like Bethlehem and Beit Sahur have watched the construction with dismay.

Har Homa, which translates roughly as "mountain wall," looks as forbidding as a fortress. Indeed, among the advantages that residents of Har Homa have over their Israeli and Palestinian neighbors is that they do not have to gaze out at Har Homa, which is not easy on the eyes. But these new residents are also providing an advantage -- a strategic one -- to their fellow Israelis.

Har Homa is a crucial link in a chain of Israeli developments, settlements and connecting roads that surround an area of dense Palestinian population, centered on Bethlehem, and cut it off from largely Palestinian East Jerusalem. The land for Har Homa was expropriated under a left-leaning Labor government, but its construction also fits the vision of the current prime minister, Ariel Sharon, who speaks of Jerusalem as Israel's eternal, united capital.

The people who are moving here appear to be doing less in pursuit of an ideology than of an affordable home. "Where's Turkish Muhammad?" demanded an Israeli woman, abruptly striding up to Mr. Jahalin and using her nickname for another worker.

The woman, a 34-year-old accountant who identified herself as Soni, had appeared in a seemingly empty section of Har Homa to survey her new apartment, which she is about to move into. She had paid $150,000 for her three-bedroom, two-bath home, Soni said.

Her apartment's balcony offers a spectacular view over Beit Sahur toward the flat-topped hill of the Herodion, a palace constructed 2,000 years ago by another ambitious builder, Herod the Great.

Soni was not oblivious to the politics of her new home. "If Arafat and Sharon will stay at home, we will run the states and everything will be fine -- the small people," she said. But in the meantime, she explained, "my political point of view is money."

"This was my chance to buy," Soni said. "If I had $300,000, I would buy in Rehavia." That is an upscale Jerusalem neighborhood.

Indeed, prices have been dropping here, both to buy and to rent from buyers, some of whom are already offering up their homes in classified advertising. The government is subsidizing the purchase of homes.

The reason is that during the 22-month conflict, a neighboring development called Gilo, also built on 1967 land and part of the same strategic chain, has repeatedly come under fire from the adjacent West Bank town of Beit Jala. Residents of Gilo have had to bulletproof their apartments, and a cement wall now blocks their West Bank vista. A likeness of the view has been painted on the wall.

The first phase of construction of Har Homa, 2,500 units, is drawing to a close. The Housing Ministry reports that almost 1,000 homes have been sold, and that several hundred people have already moved in, living in what remains a vast construction site. Israel envisions an eventual complex of 6,500 units housing at least 20,000 Israelis, with schools, parks and shopping.

A small group of Israeli Arab and Palestinian workers is also living in Har Homa, in a plywood shack. They work and sleep in shifts, guarding the construction materials from theft. They wash outside, from a spigot, and they watch movies in Arabic received on a large satellite dish.

Under threat of suicide bombers, Israel has seized control of seven of eight Palestinian cities in the West Bank and placed them under curfew. It has dug ditches around cities like Bethlehem and filled them with barbed wire. Still, Israeli security officials say, thousands of Palestinians find ways each day to get into Israel, not, in their case, to kill others and themselves but to find work.

The Palestinian workers said they could make up to 100 shekels daily here -- about $21 dollars -- compared with nothing at all in the West Bank. As the conflict has ground on and Israel has sealed off Palestinian areas, the Palestinian economy has collapsed.

The men said other Palestinians did not criticize them. "Everybody knows that it's a settlement, but nobody asks you not to work," said one man, who gave his name only as Hassan, 30, the father of five. "They know the alternative: not to eat." Hassan lives half an hour away, but he stays at Har Homa for two weeks at a stretch to avoid getting caught.

Toward dusk one evening this week, a dozen Palestinian men were seen dashing from Har Homa, through a break in the construction fence, down the rocky hillside and toward the olive groves of the West Bank.

"It's painful to see the Israeli police come here and arrest these people," said one of the guards, Salem Alkuran, 18, an Israeli Arab from Beersheba.

The Palestinian workers said they had been hired by Israeli Arabs serving as middlemen to Israeli Jewish bosses. Most said they spoke enough Hebrew to get by. Among themselves, the workers speak Arabic, and they talk politics.

Mr. Jahalin, the Palestinian laborer, said the only solution to the conflict was to establish a Palestinian state side by side with Israel. But Mr. Abu Tair, the electrician, differed. "These people are strangers," he said. "This is Muslim land, and an Islamic state should be established."

Mr. Alkuran, the Israeli Arab, spoke up. "We can live together," he said. "It's impossible to move the whole country."